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Is Groupon Good for Small Businesses?

By MP Mueller November 11, 2010 11:48 amNovember 11, 2010 11:48 am

MP MuellerRon Weiss, owner of Jeffrey’s

A few months ago, a Groupon coupon arrived in my in-box from Jeffrey’s Restaurant and Bar, a long-standing premier dining destination in Austin. My immediate reaction — after savoring the vision of bellying up to a half-priced plate of crispy oysters on yucca chips with habanero-honey aïoli — was, “Wow, will discounting be good for this brand?”

As more and more people are learning, social coupons can give businesses exposure to an affluent and educated audience. Rob Solomon, Groupon’s president, told me that the company’s 25 million subscribers are mostly between 30 to 50, college-educated, men and women with a household income north of $50,000. The company is active in 100 markets in North America and just announced a deal with eBay that will highlight Groupon’s regional daily deals on eBay’s pages.

The two-year-old service is so popular that the term “Groupon anxiety” is now an entry in the Urban Dictionary, and Forbes has called Groupon the fastest-growing Internet company ever (be sure to see the reader comments after the article, which include some interesting first-hand experiences). While there are no upfront costs for businesses that sign on with Groupon, the businesses do have to offer their products or services at a significant discount and they do have to split what consumers pay for the coupon with Groupon, typically 50-50.

So is Groupon a good deal for businesses?

Recently, Utpal Dholakia, associate professor of marketing at the Jones Graduate School of Business at Rice University, published a research report titled, “How Effective Are Groupon Promotions for Businesses?” The study was based on interviews with 150 businesses in 19 American cities and 13 product categories that ran Groupon promotions between June 2009 and August 2010.

Mr. Dholakia concluded that Groupon promotions were profitable for 66 percent of the businesses surveyed and unprofitable for 32 percent. He found that 42 percent of the businesses said they would not run another Groupon promotion. Mr. Solomon said that Groupon’s data differs from Mr. Dholakia’s, noting that that 95 percent of businesses choose to work with the company again. This debate, no doubt, will continue, as will the conversation about whether discounting is a good idea for a brand, particularly an upscale one.

As it happens, one of the participants in Mr. Dholakia’s study was Ron Weiss, who has owned Jeffrey’s with his wife, Peggy, for 35 years. Word of mouth and positive restaurant reviews fueled the restaurant’s success for years. But then, during the last two years, sales declined. In the fine dining sector, Mr. Weiss said, the average profit margin is 6 to 8 percent. If sales are off by more than 20 percent, well, you can see a bit of red running from those tournedos. In 34 years, Jeffrey’s had never done any discounting other than running happy-hour specials on food items in the bar. “We’ve been known as expensive, a once-a-year special occasion and exclusive place, and we’ve been trying to change that perception,” Mr. Weiss said. “We’ve added more lower costs options to our menu, made some interior changes, painted a bigger sign on the side of our building.”

The summer months in Austin can be brutally hot, and the affluent regulars at Jeffrey’s tend to hit the eject button and evacuate the city for cooler climes. Anticipating a slow August, Mr. Weiss decided to run a Groupon promotion offering $75 of food and drink for $35. The goal was to provide new customers with an experience that would make them want to return. Mr. Weiss set no limit on the number of coupons that could be sold.

Within 24 hours, 3,000 sold. The coupons were good for 90 days, which meant that at least 6,000 people were likely to be coming through the restaurant’s doors in the following 90 days. The restaurant seats 130. “We were busy beyond belief every night,” Mr. Weiss said. “Over 90 percent of the people who came in were very gracious and appreciative of what we were doing and spent extra money on food and wine. We also got a tremendous number of compliments and comments from customers saying they would probably not have come in otherwise without the discount and that they would return. It looks like it was at least a break even, maybe even a little more for us.”

Mr. Weiss said his servers and valet people benefited the most from the experience because otherwise it may have been a slow period. “It challenged them because we were so busy,” he said, “but they did a wonderful job and got compensated for it.” And what about his regulars? “Most of ours were understanding when they couldn’t get in or when it was crowded or noisier,” he said. “I did get one e-mail from a woman who said, ‘Oh my God, Jeffrey’s has sold out. I brought Oliver Stone once to dine and now you’re discounting!’ I tried to explain to her that this was a business decision and put it in the context of the economic downturn. What I really wanted to say was, ‘Have you seen Stone’s latest movie, “Wall Street, The Money Never Sleeps?” That’s selling out.’”

I talked to one regular, Lisa Jasper, who has been frequenting Jeffrey’s for the last 34 of its 35 years. Yes, she occasionally spent some time waiting for her usual “diva” table in the bar, but she said she loved the energy that the crowds brought. “And,” said Ms. Jasper, “the upside is I know my friends, the waiters, are cranking and it’s good for Jeffrey’s, which I love.”

Will Jeffrey’s use Groupon again? Mr. Weiss said that, with the introduction to new customers and with an economy that may be rebounding, he hopes he won’t need to try discounting again. Two to three days later, another high-end Austin dining icon, Hudson’s on the Bend, offered a Groupon promotion, so it appears that upscale restaurants are doing what they need to do to keep business up.

Has your business tried Groupon or another social coupon service? Were you able to retain the new customers it brought in? Was it worth the price and effort?

Next week: Branded will offer some more insights about social coupons from Jere Doyle, who is president of Eversave, another social coupon company, as well as guidelines on how small businesses can best use them.

MP Mueller is the founder of Door Number 3, a boutique advertising agency in Austin. Follow Door Number 3 on Facebook.

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